The State of Credit Markets in the UK and the US

In Q1 2017, the United Kingdom witnessed the first
tightening of consumer credit in 6 years. This is an especially troubling sign,
given the Brexit reality that has befallen Britons since the historic Brexit
referendum on June 23, 2016. That the GBP/USD pair plunged to a 31-year low
shortly afterwards is testament to the inherent volatility in the financial
markets. The Bank of England (BOE) has been cautiously eyeing proceedings,
offering a steadying hand wherever needed to guide the UK economy through these
troubled times.

It was somewhat surprising to myself and other financial
analysts that the UK weathered the infancy stages of the Brexit storm so well. That the GBP/USD pair is currently short-term bullish is
particularly encouraging, given the grim reality of the complex extrication
process ahead for the UK. Nonetheless, UK consumers were not deterred by plans
to divorce from the European Union, and they continued to spend throughout Q3
and Q4 2016. The problem is that the lag effect has finally caught up with
folks in the UK, and Brexit realities are coming home to roost.

BOE Cautions
of Rising Consumer Borrowing in the UK

Multinational conglomerates have made no bones about their
desire to repatriate jobs and headquarters to other cities in Europe such as
Frankfurt, Paris, Milan and elsewhere. The loss of European passporting rights
that is possible if multinational banks and financial institutions remain in
the City of London is simply too great to bear. Meanwhile, Britons were
supporting an inflated UK economy post-Brexit referendum by continuing to
borrow money from banks and other lenders.

This gave the impression of a thriving economy, but the
recent contraction, as reported by the BOE is now troubling. Indeed, BOE
governor, Mark Carney once said that rising consumer borrowing is more
troubling to the United Kingdom than the Brexit itself. The BOE has been hard
at work stabilizing monetary policy to facilitate the smooth passage of the
Brexit. Nonetheless, consumers are having none of it and spending remains above
forecasts. Retail banks have not wasted any time and are now tightening all the
criteria and conditions placed on consumer credit. This includes credit cards
and unsecured personal loans.

UK and US
Credit Markets Remain Favourable to Consumers

As a financial consultant, I always recommend that you monitor your credit to ensure that you are getting the best deal on the market.
UK interest rates may be favourable to credit expansion, at 0.25% but credit
defaults are growing. The BOE governor, Mark Carney will be giving a speech on
Thursday, 20 April 2017, but for now it appears that the bank rate will remain
at its historical low and that the BOE will continue its accommodative monetary
policy with asset purchases of £435 billion. This monetary accommodation means
that the cost of credit in the UK will likely remain cheap in the near future,
but it says nothing about defaults or banks inclinations to make their lending
criteria more stringent.

In
the US, there are some deeply troubling signs taking root and these are related
to huge retail operations and possible credit defaults. It comes as no surprise
that e-commerce is driving retail activity in Western countries. However, this
puts traditional retailers at a distinct disadvantage, particularly those with
hundreds of outlets across the country. Three particular brands are facing
tremendous pressure in the form of J.C. Penney, Sears, and Macy’s. Online
shopping has decimated their bricks and mortar operations, yet these companies
have been borrowing hand over fist to try and maintain retail operations. This
is creating another potential crash the likes of which we lost witnessed in
2008. If companies like Macy’s, Sears, and J.C. Penney appear to be folding, we’re
going to see various hedge funds coming into play betting against these firms.

Already
we saw $5.3 billion of commercial mortgage-backed securities in February 2017 –
that’s up 50% year-on-year. Retailers are failing across the board, and this is
evident in the price of Target Corporation, Costco, and others. Many malls
across America are going to feel the credit crunch as a result of decreased
foot traffic through their stores. While this may not be anywhere near as big
as the mortgage-backed securities markets, we are still talking a major
downward revision in US retail and these companies will like default on their
outstanding loans. This will invariably cause the shuttering of malls across
the US. This type of ‘negative credit sentiment’ is being punted by major banks
like Morgan Stanley and Deutsche Bank, as retail loan delinquencies continue rising.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.